Market Perspective for July 18, 2016

Markets rallied strongly last week in response to positive earnings and the move carried into the start of this week. Major indexes remarkably opened to the positive on Monday morning despite recent violence and geopolitical unrest, signaling unprecedented resilience in the world’s economies. The Dow Jones Industrial Average and S&P 500 Index are achieving new records with every positive closing. Although still below its all-time high, the small- cap Russell 2000 could surpass the Dow as best performing major index in 2016. In addition to the substantial rally that has followed Brexit, business opportunities are beginning to appear on Great Britain’s horizon.  Japan’s Softbank Group has announced its largest investment to date with the purchase of British microchip manufacturer ARM for just over $32 billion, signaling global confidence in Britain’s post-Brexit future.  ARM provides chips for almost all of the world’s smartphones, including the Apple iPhone and has handily outperformed apple YTD.

Almost 20 percent of the S&P 500 reports earnings this week. On Monday, Bank of America (BAC) reported a decline in profits from last year as low interest rates squeezed lending profits, but strong bond trading amid the Brexit storm lifted earnings beyond estimates to rally shares more than 1 percent. BAC is the fourth big bank to report this season and the third to beat estimates. Goldman Sachs (GS) and Morgan Stanley (MS) are scheduled to report later this week.

Monday’s major earnings reports include Netflix (NFLX) and International Business Machines (IBM). NFLX shares have steadily declined over the past year amid competition pressure, but with over 700 new worldwide subscribers each quarter, an earnings miss would only serve to extend the opportunity to buy NFLX at a value. On Tuesday, investors will hear from Johnson and Johnson (JNJ), Microsoft (MSFT) and Lockheed Martin (LMT). Intel (INTC) and Halliburton (HAL) will report Wednesday, while Thursday brings earnings from Amazon (AMZN), General Motors (GM) and Visa (V). General Electric (GE) and Honeywell (HON) report Friday.

Yahoo (YHOO), Qualcomm (QCOM), Philip Morris International (PM), Regions Financial (RF), Illinois Tool Works (ITW), Abbot Labs (ABT), St. Jude Medical (STJ), American Express (AXP), Starbucks (SBUX), Vale (VALE), PulteGroup (PHM), Chipotle (CMG), Biogen (BIIB), Schlumberger (SLB) and AT&T (T) will also report this week.

Financials, Industrials, energy services, pharma and large-cap technology will generate the greatest earnings-related impact this week.  Regional banks are likely to follow larger institutions into higher territory due to rate hike delays and loan activity.

Alcoa (AA) and JPMorgan Chase (JPM) set a high bar last week with strong earnings reports. S&P 500 earnings were initially expected to fall 5.6 percent, but improved to 5.5 percent after last week’s reports. As of Friday, 66 percent of reporting S&P 500 companies beat earnings estimates. If this pace of earnings beats continues, we will see S&P 500 earnings growth improve substantially from those initial estimates.

U.S. housing starts and building permits for June will be available this week, as well as Wednesday’s Crude oil inventory and mortgage purchase application index data. The crude oil market is in the midst of a bull-bear battle around $45 per barrel. Falling crude inventories have been offset by rising distillate inventories, giving each side some fundamental support. Home builder stocks are trading near their 52-week high and only need a small push to enter a new post-2007 high.

The highly anticipated European Central Bank rate decision, the first since Britain’s decision to exit the European Union will be announced on Thursday in addition to the release of the U.S. weekly unemployment claims, existing home sales and the Philly Fed manufacturing survey. Friday’s reports will include the flash Purchasing Manager Index numbers from Japan, the Eurozone, the UK and the U.S. Analysts expect all of those reports to indicate slight improvement in the manufacturing sector.


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